equity scams may 2015
TRANSCRIPT
Equity Scams & How to Avoid Them
Stephen ClaphamMay 2015
South Sea Bubble
• First bubble 1720• Still happening
Reminiscences of a Stock Operator
• Edwin Lefèvre’s wonderful book • “Nowhere does history indulge in
repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators to-day differ from yesterday. The game does not change and neither does human nature.”
May 2015 a busy time
• Hanergy collapses in Hong Kiong• HK regulators rush in• Goldin – two companies shares
collapse • Then bounce back a little• Plus500 slumps in London
How to detect an Equity Scam?
1. Dislocated Listing2. Heavy Insider Holding 3. Meteoric Share Price Rise4. Young/inexperienced founder 5. Isolated industry 6. Accounting restatements7. No analyst coverage
1 Dislocated Listing
• Crooks are known at home• Be wary of a company listing in a
foreign jurisdiction• Unless there is good reason• Eg domestic market does not
understand sector
2 Heavy Insider Holding
• Sometimes a positive• But can lead to manipulation• Can be dangerous if supported by
heavy indebtedness• Also leads to illiquid stocks, more
easily manipulated
3 Meteoric Share Price Rise
• If it is a scam, it wont be for 10%• Companies with stratospheric
appreciation should be addressed with care
• Not always sinister of course• Just a signal to be wary• Especially if other conditions fulfilled
4 Young/inexperienced founder
• Often happens with web companies• Not bad of itself• But again a reason to be wary
5 Isolated industry
• No supply chain?• In-house supply chain?• How realistic are the volumes?• Can you see cash coming in from
customers?
6 Accounting restatements
• Restatements sometimes legitimate• But always a reason to ask questions• Plus 500’s 2014 UK accounts saw a
restatement of cash balances –unusual.
• Its other restatements are potentially explicable, and not necessarily sinister.
7 No analyst coverage
• Or house broker only• Why is there no independent view?• Could be company is too small• Or insufficient volume• Or could mean City is suspicious
One Simple Rule
• If it smells, it’s probably going to cost you money
• If in doubt, avoid
